Vallejo Headed for Another Bankruptcy?
On May 6, 2008, the Vallejo City Council voted 7-0 to file for Chapter 9 bankruptcy. At the time it was the largest city in California to do so.
In March of 2009 I noted Judge Rules Vallejo Can Void Union Contracts.
Vallejo foolishly refused to do so, and I predicted it would soon be back in bankruptcy over the same reason it went bankrupt in the first place: absurd union wages and even more absurd pension promises.
Sure enough, here we go again.
Vallejo Still Can’t Afford its Pricey Pensions
CNN Money reports Once Bankrupt, Vallejo Still Can’t Afford its Pricey Pensions
The California city of Vallejo emerged from bankruptcy just over two years ago, but it is still struggling to pay its bills.
The main culprit: Ballooning pension costs, which will hit more than $14 million this year, a nearly 40% increase from two years ago.
Amid threats of legal action from the state’s pension giant, CalPERS, Vallejo did little during its nearly three-year stint in bankruptcy to stem the growth in its pension bills.
As a result, Vallejo continues to dole out large sums of money for retirees. Except for new hires, Vallejo’s police and firefighters can retire at age 50 with as much as 90% of their salary — for life. Public safety workers who retired in the last five years have average annual pensions of more than $101,000.
And the pension costs are expected to continue to rise, with a projected increase of up to 42% over the next five years.
Moody’s recently warned that Vallejo’s pension obligations could force it to file for bankruptcy protection a second time. The credit rating agency said the city offers a cautionary tale for two other California cities teetering on the brink: San Bernardino and Stockton.
“If we don’t resolve those costs, then we’re going to see services continue to suffer,” said city manager Dan Keen, who has led the city since 2012. “We’re going to have to cut somewhere.”
A lot of cuts have already been made.
Vallejo’s roads are littered with potholes. Three of its nine fire stations remain closed. And its police force is down by almost 40% — though Keen says there are plans to hire more officers this year.
Crime has surged, with more than two dozen homicides last year, compared to only seven in 2006. Burglaries are also on the rise. Residents maintain neighborhood watch groups, but the crime is taking a toll.
“Some people in my neighborhood are voting with their feet and leaving Vallejo,” resident Russell Zellers wrote in a 2013 letter to City Hall. “If things continue along the present course, I may not be far behind them.”
I am not the only one who predicted another mess for Vallejo. Steve Greehut did the same. For details, see Vallejo’s post-bankruptcy plight gets little notice in California’s state capitol.
Only One Way to Resolve Costs
There is one and only one way to resolve costs: pension haircuts. Since the state will not allow pension cuts any other way, countless California cities are doomed to bankruptcy.
Oakland, LA, San Diego and numerous other cities are completely zombified by pensions. Eventually all of them will be forced to declare bankruptcy unless a way is found to otherwise reduce pension costs.
The citizens of Vallejo and all the other walking dead cities should not have to suffer through round after round of tax hikes, so a privileged few can retire at age 50 with 90% of top salary pensions for life.
Sooner or later one of these cities is going to do the right thing: smash CalPERS arrogance straight down CalPERS’ throat via massive across the board pension cuts in bankruptcy.
A judge allowed Vallejo to do just that. Vallejo refused (most likely to protect the pension plans of corrupt city officials and friends of city officials).
Vallejo will get another chance soon enough to do what needs to be done.
About the Author: Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.